Arnon Kohavi, Chilean Culture and the Chilean Startup Scene

Arnon Kohavi’s post on The Next Web titled Why this investor abandoned setting up a startup fund in Chile after just 6 months has provoked heated reaction inside and outside Chile.  I wanted to add to the discussion.  I’m the cofounder of Entrustet, the 7th team to arrive as part of Startup Chile in November 2010. I stayed in Chile after my 6 months in Startup Chile were over because I think Chile is a great place to live, the people are friendly and there are really big business opportunities. Plus I like pisco.

I’ve gotten to know a bit about Chile and the entrepreneur ecosystem and wanted to share my thoughts.  Parts of this post may seem harsh, but remember, I could write a similar post about Madison, WI or any other city not named New York or San Francisco.  I’ve summarized Kohavi’s main points about Chile and the entrepreneur ecosystem (read the entire interview) and tried to respond to each one.

Chile is less dynamic than Asia because it is controlled by a handful of rich families who don’t care about the young or the poor.  They give money to support entrepreneurship, but it’s only in Spanish and they do it to stroke their ego.  Conservative organizations like Opus Dei and a bigoted older generation don’t encourage social ascension. Chile’s main problem is mental isolation, not just geographic and Chilean startups have to move abroad to be successful.  The investors are private equity guys who don’t know entrepreneurship or entrepreneurs. In 10 years and with education, Chile can be dynamic, but its not ready yet. That’s why I’m going to Singapore.

So is Kohavi right?  For him, leaving makes perfect sense because he wants to make money NOW and I’m not sure Chile actually needs a real Series A fund right now.  It needs more mentoring and smaller infusions of capital on the angel/micro angel scale.  Kohavi’s business model was not correct for the time in Chile.  I think if he experimented with business models, he could have made a name for himself and his fund, but instead he chose to go to Singapore.  Nothing wrong with that at all.

Next, he hits a wide range of issues affecting Chilean culture and the entrepreneur ecosystem and its potential for growth.  Has he been fair to Chile?  Lets take a closer look based on what I’ve seen over the past year.

I believe that there are huge opportunities for home grown and foreign entrepreneurs in Chile and Latin America.  They are just harder to execute.  Chileans are smart, talented and hard working and there are some great Chilean entrepreneurs.  I don’t see Kohavi’s article as an attack on them.  In fact, I respect Chilean entrepreneurs even more because they are able to succeed in a tough environment. Entrepreneurship is hard enough in Silicon Valley. Adding in Chilean cultural barriers and a developing ecosystem adds many additional roadblocks.  It’s harder to be an entrepreneur in Chile than in the US.

Kohavi is right, Chile is a very conservative country controlled by a few powerful families, supported by a small, wealthy upper class.  Many of these powerful families have natural resources connections.  Chile is very class stratified and Kohavi is right that class ascension is not encouraged.  Its not quite overtly discouraged, but it’s extremely common to hear “what high school did you attend, what’s your last name, are you related to so and so” in social conversations and even business meetings. People know their place and the classes really don’t mix.  In the US we have the American Dream which states that if you get a good education and work hard, you can move up in society.  Whether the American Dream is actually true anymore or is now just a myth is very debatable, but upward mobility is instilled in us from the time we are 5 years old.

Like Sarah Lacy says, Chile’s wealthy are no different from old monied elite in the US, Europe, or anywhere else in the world.  Most elites like their power, their money and their lives and try to stay where they are and amass more land, money and power.  It’s normal.  But Chile is unique because the elite group is small enough that innovation can be stifled.  For example, I have a friend who wanted to implement a new process to save a few large companies lots of paperwork, time and money.  These companies could pass on their savings to consumers or earn more profit.

He got the right meetings through business associations and government contacts, but when he went to the sales meeting, the big wigs who organized the meeting trashed my friend’s idea in front of his potential client.  A few months later, my friend found out that the big wig was good friends with the guy who currently made a bunch of money managing the paperwork.  My friend’s solution would speed up commerce, save consumers money and time, but at the detriment of this guys friend.  This behavior is normal in all countries, but Chile is small enough that it can kill startups right in the beginning.  You don’t need the elites to buy into entrepreneurship, but it sure helps.

Chilean culture punishes failure and taking chances.  As the founder of a startup, people look at you like you’re unemployed, bouncing around with no direction in your life.  Companies are very conservative and there’s lots of red tape, paperwork and bureaucracy.  There’s also a very Chilean behavior, the “soft no”, where companies won’t say no directly and they’ll explore a deal for months on end with no desire to actually do anything.  I’ve also noticed that many Chileans are stubborn and very very unwilling to admit that they are wrong, as losing face/honor is more looked down on than in the US or Europe.  When working in startups or trying to make sales to large companies, this attitude is very hard to overcome.

People also are very open about nepotism.  In the States, one of my good friends got a job because his father was friends with the CEO of the company.  He does everything he can to hide that fact and works even harder to prove that he belongs.  In Chile, I see many people getting jobs because of connections, just like in the US, but in Chile people are proud that they’ve gotten the job that way.  It’s almost like a badge of honor.  That’s not good for a merit based startup ecosystem.

I’ve noticed a huge difference in attitude between Chileans who have lived and worked in the US, Europe or Australia compared with Chileans who have never been abroad for significant amounts of time.  Most who have lived abroad realize that being stubborn and refusing to admit they are wrong will not get them anywhere.

Kohavi is right on about most Chilean investors.  I spoke to just about every Chilean VC and angel network and the vast majority were bankers and private equity guys who knew nothing about startups.  They were investing in ideas, not entrepreneurs.  They tried to get the most equity possible (sometimes up to 60%!) and looked at it like a zero sum game, not as a partnership.  Industry standard is 20-35%.  This approach kills motivation in entrepreneurs and kills returns for investors.  But this it’s normal for a growing ecosystem, all of the VCs are learning on the fly.

So where do we go from here?

Chile has smart entrepreneurs, talented developers, great potential employees and has seen some successes (Needish, Zappedy, Welcu, Plataforma Arquitectura and others), but what makes life easier for entrepreneurs and really develops the Chilean startup ecosystem?  It’s not a bad thing that entrepreneurs have to leave Chile to succeed.  That’s how it is in most places not named New York, San Francisco and Austin.  The key is to create the development ecosystem so that companies can hire good talent and make entrepreneurship a viable model for a higher percentage of people so that the ecosystem grows over time.

Startup Chile

Startup Chile was founded to help change the culture by bringing foreigners, but they realized they were wrong to exclude Chileans after our first round.  Since then, they’ve accepted at least 55 Chilean startups.  The program is having some success: 8 of 23 startups in my round stayed and Chile is now on the world stage for its innovative program.

There are some downsides.  First, Startup Chile is going for quantity and critical mass over quality.  If it were me, I would have invited 25 high quality startups per round to avoid poor quality founders and people just looking for an adventure.  Creating the critical mass was not always in the plans, but after Vivek Wadhwa’s visit in 2010, plans changed.  To cope with the increased scale, they outsourced the judging to a group composed of many academics who don’t seem to understand startups. There are no interviews anymore, which leads to some companies who don’t deserve to be selected to slip in and some who would get selected in an interview to miss out.

Its unquestionable that Startup Chile has been a force for good. Unquestionable.  The team is incredibly dedicated and hard working, but I believe that the program won’t be as big of a success as it could have been, mostly because its brought too many lower quality startups because of focus on quantity, and the outsourced judges reliance on degrees from fancy universities instead of top notch entreprnerus who know how to get things done.

Global Connection

I would expand Global Connection, a government program to take Chilean entrepreneurs to foreign countries, to place smart, promising Chileans in top internships and jobs in the US, Europe and Australia.  I would select 300+ young Chileans every year and give them grants to encourage them to go abroad.  I believe that it’s not good enough to bring foreign entrepreneurs to Chile and give some Chileans money from Corfo.  It’s a start, but only part of the solution.  Chile needs to develop its intellectual capital and I think the best way to do it is to encourage Chileans to work abroad and then return home to share their experiences.

An ICQ like Success

Israel’s startup scene took off after ICQ was acquired for a ton of money.  Same thing happend in Madison after Jellyfish.  It showed everyone that they could start a startup and that it was a real career.  Chile needs a similar success.  Culture will not change without examples of success to show that entrepreneurship is a viable path.  It will be even better if the huge success comes from someone who’s already tried another startup and it did not succeed.

Overall, I think Chile is one of the most interesting places to start a business.  It has smart people, an involved government, lots of problems that need solving.  There are cultural issues that are holding many entrepreneurs back.  Some of these challenges are normal in a growing startup ecosystem, while others are particular to Chile.  I think Kohavi was naive about what to expect in Chile and I don’t read his interview as a knock on Chilean entrepreneurs.  I love this country and look at it as my second home. I still see huge potential in Chile and an ecosystem that’s made huge progress in the year since I arrived.

What do you think?

Here’s some other people’s comments on Kohavi’s comments:

Sarah Lacy – Attention World Don’t Give Arnon Kohavi Your Money

Mariano Amartino – De Chile, Startups y Oportunidades en Latinoamerica

Fayerwayer – Inversionista de riesgo abandona Chile